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Pyramid Development, LLC v. DuKane Precast, 2014 IL App (2d) 131131, vividly illustrates the importance of diligent record-keeping practices on construction projects and the dire financial consequences that can flow from a failure to do so. It emphasizes how crucial it is for a contractor to comply with Section 5 of the mechanic’s lien act – 770 ILCS 60/5 (the “Act”) – the section that requires a contractor to give the owner a sworn statement that lists all persons providing labor and materials on a project.

The plaintiff contractor sued to foreclose a mechanics lien on several townhomes it was hired to build and also sued a subcontractor for defective concrete work supplied to the project. After a bench trial, the court nullified the lien because it was negated by damage to the property. Plaintiff appealed.

Result: Plaintiff’s lien is defeated because it didn’t comply with Section 5.

Reasons:

– The purpose of the Section 5 affidavit is to put the owner on notice of subcontractor claims;

– An owner has the right to rely and act upon a contractor’s section 5 affidavit unless the owner has reason to suspect the notice is false or knows that it’s false;

– An owner is protected from subcontractor claims where they’re not listed on the contractor’s affidavit unless the owner knows of the subcontractor omissions or has colluded with the contractor to exclude the subcontractors;

– Section 5 provides that it’s the owner’s duty to ask for and the contractor’s obligation to supply a sworn statement listing all parties furnishing lienable work on the property and the amounts owed to them;

– An owner’s previous acceptance of a flawed Section 5 affidavit doesn’t waive the contractor’s compliance with that section. (i.e., Just because an owner has accepted deficient affidavits in the past, doesn’t mean the contractor doesn’t have to comply with Section 5, e.g.)

(¶¶ 26-29).

Here, the property owner had a pattern of accepting faulty Section 5 affidavits. The plaintiff’s principal admitted that the names and amounts on the affidavits were often wrong and the amounts inflated. Plaintiff also conceded that it routinely named itself as a subcontractor when it didn’t actually do any of the work on the townhomes.

The court held that since the plaintiff’s section 5 affidavits were facially erroneous, the lien claim was properly defeated.

The court also affirmed judgment against the plaintiff on its breach of contract claim. In a breach of contract suit involving construction services, a contractor is held to the “substantial performance” standard: he must perform in a workmanlike manner and a failure to do so is a breach of contract. (¶ 35).

A breach of contract plaintiff must also prove money damages. And while he doesn’t have to do so with mathematical certainty, he still must offer some basis from which the court can compute the damage with reasonable probability. (¶ 37).

Here, the plaintiff didn’t meet his burden of proving damages. Its record-keeping was scatter-shot and rife with discrepancies. The plaintiff’s numbers didn’t match up and it couldn’t explain myriad invoice errors at trial. This failure to carry its burden of proving damages doomed the plaintiff’s breach of contract claim.

Take-aways:

Accurate record-keeping is essential; especially on high dollar projects with multiple contractors;

Where an owner requests a section 5 affidavit, the contractor must supply one;

A contractor lost its nearly $400,000 mechanics’ lien when it failed to serve a “Section 5 statement”, which lists subcontractors and amounts owed and owing, after the property owner requested one. 770 ILCS 60/5 (the “Lien Act”).

In Cityline Construction v. Roberts, 2014 IL App (1st) 130730, the parties entered into an oral contract for fire restoration work. The plaintiff contractor sued to foreclose a mechanics lien and for breach of contract and quantum meruit. The owners, in turn, filed a declaratory judgment counterclaim seeking to invalidate the mechanics’ lien. During discovery, the contractor admitted in response to the homeowner’s request to admit facts that it (the contractor) never provided a Section 5 statement despite the owner’s request for the statement. The trial court granted summary judgment for the homeowners on their counterclaim. The court held that the contractor’s failure to supply the statement was fatal to its lien claim.

Held: Affirmed.

Rules/reasoning:

The Lien Act is strictly construed and its provisions must be scrupulously followed. Section 5 of the Lien Act requires a contractor to provide (and an owner to request) a sworn statement listing names and addresses of all parties furnishing labor and materials to a job and the amounts due or to become due each party. 770 ILCS 60/5. The contractor admitted not providing a Section 5 statement but argued that strict compliance should be relaxed and that the failure to give the statement didn’t harm the owners. Cityline, ¶¶ 11-12.

Rejecting this “no harm, no foul” argument, the Court provided a synopsis of several Illinois cases from the past several years that, in unison, have held that the technical requirements of Section 5 of the Lien Act must be strictly complied with for a lien to be valid. Cityline, ¶¶ 13-17. The Court refused to read any exceptions into or engraft any limitations on the Lien Act’s statutory language. Since the evidence was clear that (a) the owners requested a Section 5 statement, and (b) the contractor failed to supply the statement, the lien was invalid.

All is not lost for the contractor though. The contractor still has valid breach of contract and quantum meruit claims. The Cityline court stressed that a contractor’s failure to provide a Section 5 statement doesn’t defeat a breach of contract or alternative quantum meruit action. But losing the lien claim is an obvious blow to the contractor though. With no security for its claim, the contractor must now hope that if it wins a money judgment against the owners, they (the owners) will have non-real estate assets with which to satisfy a judgment.

Take-aways:

An example of strict statutory construction. The contractor’s equitable (the purpose of the section was met) and policy arguments (the court shouldn’t vaunt form over substance) were discarded. Lost in the analysis is that Section 5 also imposes a duty on the owner to specifically request a Section 5 statement. The Court suggests that if the owner fails to ask for the statement, it possibly won’t defeat a contractor’s lien claim. Cityline, ¶ 22. But even so, the cases cited by the Court that hold that a Section 5 statement can be waived where the owner fails to request one, are more than 100 years old and involve an outdated version of the Lien Act. Clearly, the prudent practice is for the owner to request a Section 5 statement and for the contractor to provide a Lien Act-compliant statement in response.

Section 34 of the Illinois Mechanics Lien Act (770 ILCS 60/34) presents a way for an owner to quickly dispose of a contractor’s lien recorded against his/her property. Typically, the owner serves the Section 34 notice and the contractor must either sue to foreclose its lien within 30 days or it loses the lien.

But what if after the owner sends a Section 34 notice, the general contractor (who hired the subcontractor) files bankruptcy before Section 34’s notice period ends? Does the clock stop or does it keep running?

The subcontractor defendant was hired by a general contractor to do flooring work on plaintiff’s Chicago residence.

After completing the flooring work, the subcontractor liened the home to secure payment. The homeowners sent the subcontractor a Section 34 notice. The general contractor filed for bankruptcy protection during the 30-day notice period.

When the subcontractor failed to sue, the homeowners sued the sub to quash its lien.

The trial court granted plaintiffs’ summary judgment motion on the basis that defendant subcontractor failed to file suit within Section 34’s thirty-day period forfeited its lien.

Held: Summary judgment for homeowners affirmed; but for a different reason.

Reasoning:

The Court held that the general contractor’s bankruptcy filing does toll the subcontractor’s 30-day period to file suit. This is because of the automatic stay that applies once a party files bankruptcy.

Since a general contractor is a necessary party to a subcontractor’s lien action (770 ILCS 60/28), the subcontractor would violate the automatic stay by suing to foreclose its lien after the general contractor filed bankruptcy. ¶¶ 20-23. The subcontractor must wait until the general contractor’s bankruptcy stay ends or is lifted to sue on its lien.

But the Court did affirm summary judgment for the plaintiffs-homeowners under Section 5 of the Act (770 ILCS 60/5). Section 5 aims to protect an owner from paying twice for the same work. It requires the owner to demand from the contractor – prior to payment – a sworn statement that details all subcontractors who worked on a given project. ¶ 14.

Section 5 imposes a reciprocal duty on the contractor to provide an owner with a sworn statement as a condition to payment. An owner is entitled to rely on a contractor’s affidavit when making payment and is insulated from unknown subcontractor claims so long as the owner had no knowledge the contractor’s affidavit is false. ¶ 24; 770 ILCS 60/27.

Here, the bankrupt general contractor provided the plaintiffs with sworn statements that failed to list defendant/sub’s identity or amounts owed it. Moreover, according to the plaintiffs’ uncontested affidavit, they never received notice of subcontractor’s lien until several months after they paid the general contractor in full. The Court found that because plaintiffs had fully paid the contractor and had a zero balance on the prime contract when they received the sub’s lien notice, the sub’s lien claim was invalid. ¶ 26.

Take-aways:

1/ A general contractor’s bankruptcy stays a subcontractor’s 30-day time period to sue on his lien after receiving a Section 34 notice;

2/ Subcontractors must be vigilant to ensure a general contractor is providing an owner with accurate sworn statement information.